Weekly Market Update – 16 April 2018 BMO

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WEEK IN REVIEW – 9 to 13 April 2018: Light Volume Overshadows Gains

Wall Street had a good week in terms of gains, but volume was light, pointing to a lack of conviction among investors — who spent the week digesting a steady stream of headlines. The tech-heavy Nasdaq Composite led the major indices higher, adding 2.8%, while the S&P 500 and the Dow Jones Industrial Average advanced 2.0% and 1.8%, respectively.

The stock market began the week on a positive note following weekend interviews from several White House officials, including Treasury Secretary Steven Mnuchin, that helped to alleviate fears that the U.S. is barreling towards a tit-for-tat trade war with China. Chinese President Xi Jinping helped further improve investor sentiment with a speech at the Boao Forum on Tuesday, saying that he plans to “significantly” cut tariffs on imported automobiles, reduce duties on other imported goods, and improve the intellectual property rights of foreign firms.

Moving to the Middle East, geopolitical tensions were heightened following a suspected chemical attack from the Syrian government on the rebel-held town of Douma that killed at least 40 people over the weekend. The situation escalated even further on Wednesday morning when Russia, which supports Syrian President Bashar al-Assad, warned that it would shoot down any missiles fired at Syria — to which U.S. President Donald Trump replied “get ready Russia, because they will be coming.”

As of this writing, the U.S. has yet to strike the Syrian government, but it could happen at any moment. The attack was first thought to be imminent, but President Trump muddled that belief on Thursday by tweeting that it could happen “very soon or not so soon at all!”

In addition to the situation in Syria, a missile attack aimed at Saudi Arabia by pro-Iranian rebels in Yemen served to further escalate tensions in the region. Saudi air defense forces intercepted one missile over the capital Riyadh on Wednesday, while two others were intercepted over the southern areas of Jazan and Najran.

With all the concerning headlines out of the oil-rich Middle East, traders pushed oil prices substantially higher this week, betting that the tensions will eventually lead to a slowdown in production. West Texas Intermediate crude futures surged 8.4% to $67.26 per barrel, closing Friday at their highest level in more than three years. The S&P 500’s energy sector benefited from the jump in oil prices, finishing at the top of the week’s sector standings by a comfortable margin; the group added 6.0%.

In Washington, Facebook (FB) CEO Mark Zuckerberg testified on Capitol Hill this week, answering questions regarding the company’s Cambridge Analytica data scandal and Russia’s alleged use of Facebook to influence the 2016 U.S. presidential election. Mr. Zuckerberg was grilled for 10 hours by nearly 100 lawmakers, but the market seemed satisfied with his answers. Facebook shares climbed 5.3% over the two days of testimony, eventually finishing the week with a gain of 4.7%.

On Friday, big banks kicked off the first quarter earnings season, with JPMorgan Chase (JPM), Wells Fargo (WFC), and Citigroup (C) all beating profit estimates on in-line revenues. However, shares of the three lenders, and the broader financial sector, sold off in the wake of the reports. The financial sector settled the week with a gain of 1.0%, which placed it in the middle of the sector standings. The lightly-weighted utilities and real estate groups finished at the back of the pack, losing a little more than 1.0% apiece.

Investors received the minutes from the March FOMC meeting this week, but the report contained few surprises. Some key inflationary data was also released this week – namely the CPI readings for March – but was met with a largely muted response from the market. In short, the consumer prices report showed a firming (though not scary) inflation trend that will keep the Federal Reserve wedded to its tightening bias and its belief that at least two more rate hikes are warranted this year.

The CME FedWatch Tool still anticipates that the next rate hike will occur at the June FOMC meeting with an implied probability of 95.0% (up from 85.2% last week). The market also still believes there will be a total of three rate hikes in 2018, but the chances for a fourth hike increased to 36.8% (from 26.3% last week).

Friday 13 April Summary: Stocks Trim Weekly Gains on Friday

Stocks slipped on Friday, ending a positive week on a disappointing note, as some geopolitical angst prompted investors to take some money off the table ahead of the weekend. The S&P 500 declined 0.3%, the Nasdaq Composite lost 0.5%, and the Dow Jones Industrial Average dropped 0.5% – trimming their gains for the week to 1.8%-2.8%.

The major averages started the session modestly higher following better-than-expected first quarter earnings results from financial giants JPMorgan Chase (JPM), Wells Fargo (WFC), and Citigroup (C). However, after a short stint in the green, the financial sector moved lower, bringing the broader market with it. Volatility picked up in the final stretch, with the major averages dropping to new lows before bouncing back, as investors contemplated the likelihood of a U.S.-led strike on Syria over the weekend.

President Trump has promised that the U.S. will be striking the Syrian government, which is accused of carrying out a chemical attack against the rebel-held town of Douma last Saturday, but the president has intentionally made the timing of the attack unclear. Adding to the uncertainty, an attack would likely put the U.S. at odds with Russia, who supports Syrian President Bashar al-Assad and has vowed to shoot down any missiles fired at Syria.

The energy sector (+1.1%) helped keep losses in check on Friday, extending its weekly gain to 6.0%, as oil prices rallied for the fifth day in a row. West Texas Intermediate crude futures jumped 0.3% to $67.26 per barrel – their best level in more than three years – benefiting, once again, from the uncertainty surrounding the oil-rich Middle East. The utilities (+0.7%), consumer staples (+0.5%), and real estate (+0.5%) sectors also advanced, but the seven remaining groups finished in the red.

Unsurprisingly, the financial sector (-1.6%) finished at the bottom of the sector standings following the negative reaction to the big bank earnings. The consumer discretionary space (-0.6%) also underperformed, but no other group lost more than 0.3%. Within the top-weighted technology space (-0.3%), chipmaker Broadcom (AVGO) outperformed, adding 3.1%, following news that the company’s board has authorized the repurchase of up to $12 billion of common stock.

In the bond market, U.S. Treasuries finished Friday mixed, flattening the 2s10s spread to 45 basis points – its lowest level since 2007. The yield on the benchmark 10-yr Treasury note slipped one basis point to 2.82%, while the yield on the 2-yr Treasury note climbed two basis points to 2.37%.

Reviewing Friday’s economic data, which was limited to the preliminary reading of the University of Michigan Consumer Sentiment Index for April and the Job Openings and Labor Turnover Survey for February:

On Monday, investors will receive Retail Sales for March, the Empire State Manufacturing Survey for April, Business Inventories for February, and the NAHB Housing Market Index for April.

Market Internals – Friday 13 April

NASDAQ stays positive YTD, Russell 2000 turns positive YTD, DOW and S&P still negative YTD.

(Excerpts from Briefing.com)

Dollar: Dollar Index Holds

The U.S. Dollar Index was little changed at 89.78 on Friday after spending the day inside a razor-thin range. The Dollar Index followed Thursday’s uptick with an early-morning dip, which was reversed in short order. The Index returned to unchanged on Friday morning, but could not climb back above its 50-day moving average (89.85). The Dollar Index surrendered 0.4% for the week.

Bonds: Yield Curve Continues Flattening

U.S. Treasuries ended the week on a mixed note. The final session of the week was very quiet, keeping the 10-yr yield inside a three-basis point range. Treasuries began the day with modest losses, but the 30-yr bond was quick to reclaim its early decline while the 10-yr note followed suit. 10s and 30s hit session highs in mid-morning action, spending the rest of the day inside narrow ranges. The 2-yr note underperformed throughout the day, which resulted in continued pressure on the yield curve. The 2s10s spread compressed three basis points to a new cycle low of 45 bps while the 2s30s spread tightened four basis points to 65 bps, which also marks the flattest level of the current cycle.

The entire yield curve flattened over the week with the shorter maturities rising quickly while the 30-year yield stayed rooted. The spread between the 5s10s narrowed to 15bps from 19bps the previous week as did the 10s30s at 20bps from 24bps the previous week. The 45bps spread between the 2s10s is the narrowest since 2007.

Crude: Brent & WTI break multi-year highs

For the first time since November 2014, Brent closed above $72.00/barrel and WTI closed above $67.00.

OPEC releases monthly oil market report (Thu 12 Apr);

U.S. commercial crude oil inventories (excluding those in the Strategic Petroleum Reserve) increased by 3.3 mln barrels from the previous week. At 428.6 mln barrels, U.S. crude oil inventories are in the lower half of the average range for this time of year. Total motor gasoline inventories increased by 0.5 mln barrels last week, but are in the upper limit of the average range. Finished gasoline inventories increased while blending components inventories decreased last week. Distillate fuel inventories decreased by 1.0 mln barrels last week but are in the lower half of the average range for this time of year. Propane/propylene inventories decreased by 0.4 mln barrels last week, but are in the lower half of the average range. Total commercial petroleum inventories increased by 6.0 mln barrels last week.

Baker Hughes total U.S. rig count increased by 5 to 1008 following last week’s increase of 10.

Metals: Metals continues gains

Agriculture: Wheat strengthens, Corn corrects, Soy spikes

Commodities measured by the Bloomberg Commodity Index closed at 89.28, higher than 86.94 the previous week.

THE WEEK AHEAD

The sixteenth week of 2018 (wk16) tends to be one of the two most bullish weeks of the year over 15 and 21 year averages. However, in the last 10 and 5 years, the middle of week16 tends to be volatile.

Key Economic Dates

In the coming week, the US will publish retail trade, industrial production, building permits and housing starts. Elsewhere, important releases include: UK inflation, wages data, unemployment and retail sales; China Q1 GDP growth, retail trade and industrial production; Japan inflation and trade balance; Australia employment figures; and Canada interest rate decision.

Mon 16 April

Tue 17 April

Wed 18 April

Thu 19 April

Fri 20 April

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SUMMARY

The coming week will see a lot of central bankers from the US, UK and EU making statement that could move markets. Along with the Syria issue, earnings are going to be the centre of attention over the next few weeks. Early indications show bank stocks all beating Wall Street estimates, but J.P. Morgan, Citigroup, Wells Fargo and PNC were down 2 percent or more. The market pros are anticipating that geopolitical tensions could possibly overshadow an earnings season that is supposed to deliver at least a 17 percent increase in profits.

I remain bullish given that week 16 and 17 have a strong history of being bullish. But I will play it safe by going with the Syria issue probably rallying the defence industry. The flattening yield curve is getting serious along with the rising price of oil – all indications of a market topping out. I’ll be watching the manufacturing and industrial production data closely for first indications of a possible contraction along with the language of the Fed members this week.

Happy Hunting!

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Don’t forget to catch me this Saturday, 21 April 2018, for this most eye-opening session about what it takes to be the boss and why the little things we ignore can lead us to ruin.

Mark the date, note the destination and don’t miss this session for anything!

Read up on the synopsis here: Why Most Young Entrepreneurs Fail

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See you on April 21st!!

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